International Fisher Effect - IFE

AAA

DEFINITION of 'International Fisher Effect - IFE'

An economic theory that states that an expected change in the current exchange rate between any two currencies is approximately equivalent to the difference between the two countries' nominal interest rates for that time.

Calculated as:

International Fisher Effect (IFE)



Where:
"E" represents the % change in the exchange rate
"i1" represents country A's interest rate
"i2" represents country B's interest rate

INVESTOPEDIA EXPLAINS 'International Fisher Effect - IFE'

For example, if country A's interest rate is 10% and country B's interest rate is 5%, country B's currency should appreciate roughly 5% compared to country A's currency.

The rational for the IFE is that a country with a higher interest rate will also tend to have a higher inflation rate. This increased amount of inflation should cause the currency in the country with the high interest rate to depreciate against a country with lower interest rates.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  3. Fisher Effect

    An economic theory proposed by economist Irving Fisher that describes ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Inflation

    The rate at which the general level of prices for goods and services ...
  6. Purchasing Power Parity - PPP

    An economic theory that estimates the amount of adjustment needed ...
Related Articles
  1. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  2. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  3. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  4. Forex Education

    Forex Tutorial: The Forex Market

    In this online tutorial, beginners and experts alike can learn the ins and outs of the retail forex market.
  5. Forex

    Understanding Currency Carry Trade

    A currency carry trade is a long-term investment strategy used primarily by large institutional investors. The purpose is to make a profit over time from differences in interest rates between ...
  6. Forex Fundamentals

    What Would Have To Happen For The Iraqi Dinar To Become A Stable Investment?

    What factors would cause price changes in the controversial Iraqi dinar?
  7. Forex Fundamentals

    Is the Iraqi Dinar Investment a Wise Investment?

    The Iraqi dinar is a hot investment--but is it a wise one?
  8. Forex News

    How The Forex "Fix" May Be Rigged

    When it comes to forex, some types of "fixes" are legal. But some really aren't.
  9. Forex Education

    From Mrs. Watanabe To Abenomics: The Yen's Wild Ride

    Relatively recent upstarts like the euro and the yuan may hog the currency headlines these days, but for sheer drama and gut-wrenching volatility, no currency can match the venerable Japanese ...
  10. Forex Education

    Position Sizing: The Way To Profit In Forex

    Position sizing will account for the quickest and most magnified returns that a trade can generate.

You May Also Like

Hot Definitions
  1. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  2. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  3. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  4. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  5. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  6. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
Trading Center